17 November 2009

Is It Socialism? So What?

Panelists at a talk on the "Breakdown of the Public-Private Distinction" at a national meeting of The Federalist Society, a conservative lawyer and law student's group, are talking about the changes that the Financial Crisis has wrought. Remarkably, they are generally saying that the sky is not falling, even though they are concerned.

Some highlights (of a paraphrased summary):

David Leitch, Ford Motor Company

Old model: private entity regulated by public entity. E.g., Ford Motor is regulated by NHTSA.

New model: public entity as not just regulator but also part owner of private entity. E.g., GM.

Of course, the basic regulatory model has always been subject to distinctions that blur the public/private divide. There have been government-created and government-controlled corporations before. . . .

David Berenbaum, National Community Reinvestment Coalition . . .

There is basically no private mortgage industry at this time. It’s all government entities. . . .

Things are going to get worse. The option ARM bubble is about to hit, between 2010 and 2011. Mortgage payments hovering around $1200-$1300 a month are going to be adjusting upward to around $1900 a month. Many of the affected borrowers are white, middle class to affluent families. (It’s incorrect to blame the subprime mortgage crisis on lending to minorities; only a small portion of mortgages that resulted in default fall into this category.)

David Zaring, University of Pennsylvania . . .

Should we worry so much about the blurring of the public/private line?

Are government bureaucrats that different from corporate bureaucrats? Could it benefit the government to have more of a private bent?

Good news: the initial response to the financial crisis seems to have worked.

Three issues:

1. Executive compensation. Pay czar Kenneth Feinberg is reducing pay packages and trying to make them vest in a long-term way. But note that his authority extends to just seven companies that received extraordinary assistance from the government. And what he’s doing is not any more objectionable than a private equity investor holding accountable the executives of under-performing portfolio companies.

2. Resolution authority. This is striking power claimed by the government. But it has asked in various contexts before (e.g., FDIC), and constitutionally it has been upheld on numerous occasions. . . .

3. Investment management by government supervisors. The concept is that government may prevent a bank from repaying its TARP money before it achieves a certain level of capital adequacy, or government may stay invested in a company until it has maximized the net asset value on its investment. This does not seem like a radical notion.

J.W. Verret, George Mason

Government has effectively become a control shareholder in several companies — and it’s something you generally don’t want to be. More scrutiny and more restrictions come with this position. And note that you don’t need majority ownership to be a control shareholder. Government in Citigroup has under a 40 percent stake, but it is surely a control shareholder.

If you’re a control shareholder, you have fiduciary duties to other shareholders to maximize value, as well as potential liability under the securities laws. (But the government may be able to claim sovereign immunity.) . . .

Q (to Zaring): Shouldn’t we be worried about the erosion of this public/private divide?

A (Zaring): There have been some successes arising out of recent government involvement in the economy. E.g., TARP companies repaying their money to government with interest (profit for government). And there is a lot of public scrutiny of government action that will prevent abuse.

Q: What does the future hold for the economy?

A (Berenbaum): I don’t think we’re through this yet. We have upwards of 10 million at-risk consumers. Programs that help out just 1 or 2 million aren’t enough. This is why we at NCRC are interested in bulk solutions.

If hard core neo-conservative lawyers can't point at any real harms that have flowed from the "socialist" actions of the Bush-Obama response to the Financial Crisis, it is a safe bet that there haven't been any.